ETF Investors Drop Commodity and Gold Funds

After inflows in the first half of 2018, commodity-focused exchange traded funds saw sentiment reverse in Q3 as investors took flight

David Brenchley 15 October, 2018 | 8:53AM

Commodities, mining, miners, gold price, oil price, exchange traded funds, ETFs

Investors sold commodity-focused exchange traded funds (ETFs) in the third quarter of 2018, as trade tensions between the US and China geared up, according to Morningstar Direct data.

ETFs that invest in a broad basket of commodities saw net outflows of €1.8 billion in Q3, while those that track the price of individual precious metals, like gold, saw €524 million withdrawn.

For the Morningstar Commodities – Broad Basket category, it was the biggest quarter of outflows in more than 10 years, and reversed the €2.2 billion of inflows seen in the first half of the year.

The Commodities – Precious Metals category saw the most quarterly outflows since Q4 2016 and constituted a change in sentiment to Q2 2018, which saw €1.8 billion of inflows.

A couple of gold-focused ETFs did sell well, with the iShares Physical Gold ETC (IGLN) and German-listed db Physical Gold Euro Hedged ETC (XAD1) raking in €309 million and €124 million of inflows respectively.

Should recent market volatility continue, sentiment towards gold is likely to bounce back, as investors look for portfolio insurance that will guard against such dips.

Still, gold has been out of favour recently, as we have highlighted previously. And the UBS ETF Gold (AUUSI) saw over €400 million outflows in Q3. That was followed by Invesco Physical Gold ETC (SGLD) and Gold Bullion Securities ETC (GBS), which saw outflows of €323 million and €118 million respectively.

Despite that, Adrian Ash, head of research at BullionVault, notes the price is still languishing around two-year lows. This continues to offer investors looking to invest in the metal “a cheap entry point”.

“Short-term chatter about ‘safe haven’ flows misses how gold has helped reduce longer-term losses on other investments,” Ash says. “Week-to-week over the past 50 years, gold prices have shown no clear pattern with regard to whether the stock market rose or fell.

“But looking at all five-year periods, gold prices rose for UK investors 96% of the time when the FTSE has lost value from a half-decade before. Such extended losses in equities are no small risk. Since 1968 the UK stock market has traded lower from 5 years before some 20% of the time.”

Broader Commodity Issues

The biggest selling came in the broad basket category, with the iShares Diversified Commodity Swap ETF (ICOM) seeing €342 million withdrawn from its UK-listed vehicle and €421 million from its German-listed offering (EXXY).

The Invesco Bloomberg Commodity ETF (CMOD), which tracks the same index, saw €341 million withdrawn, followed by UBS ETF CMCI Composite (UC90) at €195 million.

Global investors’ allocation towards commodities has waned, according to the latest fund manager survey from Bank of America Merrill Lynch. Professional money managers are around 9% underweight, the lowest allocation in the past year and ending six consecutive months of being overweight.

In ETFs specifically, just 2% of respondents said they use commodities in their strategies, down from 4% the previous month.

The so-called trade war between the US and China has certainly not helped short-term sentiment. Indeed, between 1 January 2016 and 1 January 2018, the Bloomberg Commodity index had risen by 13.7%. In the year to mid-September, it had declined by around 5%, before rallying slightly.

Still, many believe the long-term outlook for mining commodities is positive, with drivers such as an expected boom in electric vehicles set to boost demand for copper, cobalt, nickel and others.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
db Physical Gold Euro Hedged ETC83.97 EUR-0.08-
Gold Bullion Securities ETC113.27 USD-0.10-
Invesco Bloomberg Commodity ETF17.26 USD1.67-
Invesco Physical Gold ETC117.01 USD-0.10-
iShares Diversified Commodity Swap (DE)18.79 EUR1.28-
iShares Diversified Commodity Swap ETF5.13 USD1.64-
iShares Physical Gold ETC23.60 USD-0.08-
UBS ETF (CH) Gold A dis117.16 USD-0.29-
UBS ETF CMCI Composite SF GBP A acc GBP8,744.50 GBX0.30-

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk